September 28, 2017

MONTH-IN-BRIEF: Bankruptcy & Finance

Penelope Christophorou, Taryn Darling

Bankruptcy Law

Payments to the IRS May Be Avoided as Fraudulent Transfers

By Michael Enright, Robinson & Cole LLP

The U.S. Court of Appeals for the Ninth Circuit recently held that the trustee of a plan trust may avoid as fraudulent transfers $17 million in tax payments made to the IRS by the debtor. The trustee used the Idaho UFTA and Section 544(b)(1) of the Bankruptcy Code to avoid the fraudulent transfers. The IRS defended on the basis of sovereign immunity, asserting that the trustee had to show that Congress intended to abrogate sovereign immunity for the underlying Idaho UFTA claim, even though Section 106(a)(1) abrogates sovereign immunity for Section 544(b)(1) actions.  In re DBSI, Inc., No. 16-35597 (9th Cir. Aug. 31, 2017) held that Section 106(a)(1) unambiguously abrogates sovereign immunity under these circumstances, declining to follow In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014), and setting up a circuit split. Trustees now will even more carefully scrutinize tax payments for potential avoidance, at least in the Ninth Circuit.

Penny Christophorou

Counsel; Cleary Gottlieb Steen & Hamilton LLP

Penelope L. Christophorou’s practice focuses on commercial financing, including secured transactions and bankruptcy law, derivative products, and structured finance. She represents leading financial institutions, corporate borrowers, private investment funds and sovereign clients on these matters.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.